Monday, November 8, 2010

Limelight reported revenue of $49 million, an increase of over 50% y/y including revenue from its Delve Networks acquisition. However, the company dropped the guidance midpoint for next quarter from $53.2 million to $52.5 million, or about 1.4%, and the stock fell nearly 7%, for an expectations multiple of 5.

While Wall Street overreacted to the news, this company is not that far from having some liquidity issues. It has $71 million in the bank, with no l-t debt besides a small amount of capital leases. However, it is burning about $10 million a quarter, and will need to break-even on an actual, not adjusted EBITDA, basis in order to keep funding its capital plan without borrowing. Moreover, its bandwidth costs remain over 30% of revenue, while rival Akamai's are just 16%. This is a serious cost disadvantage that the company has done little to address, and will be even more challenged to tackle if it has to cut capex to conserve cash.

While there has been some improvement in margins with growth, SG&As + R&D still add up to over 50% of revenue, compared to the low 40s for Akamai. This is a big problem when Gross Margins are still in the 40s, while Akamai's in the high 60s. While it's great to hear about all the exciting growth initiatives from mobile to enterprise storage, the company has a lot of boring expense reduction it still needs to complete in order to chip away at Akamai's cost advantage.